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Why Are Mutual Funds Being Recategorized?

SEBI wants to make it easy for a customer to choose a mutual fund according to his needs and ability. According to the regulator, AMCs use these names as marketing tools to attract customers and many of the new buyers may not fully understand the scheme. So SEBI wants MF companies to distinguish different schemes in terms of asset allocation and investment strategy. The regulator also wants to bring in a uniformity in similar schemes launched by different mutual funds so that an investor finds it easier to compare the products before buying.
That is why in its October 6, 2017, circular MF categorization, SEBI while laying down the categories of schemes, described each scheme’s characteristics. The regulator mandated fund houses to categorize all their existing and future schemes into five broad categories and 36 sub-categories. The five broad categories are – equity funds, debt funds, hybrid funds, solution-oriented funds and other funds.
There is clear classification as to what is a large cap, mid cap or a small cap company

Market CapitalizationDescription
Large Cap Company1st to 100th company in terms of full market capitalization
Mid Cap Company101st to 250th company in terms of full market capitalization
Small Cap CompanyCompanies beyond 250th company in terms of full market capitalization
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SEBI Categorization of Equity Mutual Funds

Equity PortfolioPortfolio Construction
Large Capsto invest at least 80% in large caps
Large & Mid Caps  to invest at least 35% in large caps and at least 35% in mid caps
Mid Caps  at least 65% in mid caps
Small Capsat least 65% in small caps
Multi Capsat least 65% in equities & no market-cap wise restriction
Dividend yieldat least 65% in equities but in dividend yielding stocks
Contraat least 65% in equities (A fund house can either offer a contra or a value fund not both)
Valueat least 65% in equities (A fund house can either offer a value or a contra fund but not both)
Focusedat least 65% in equities but can have a maximum of 30 stocks
Sectoral or Thematic  at least 80% in chosen sector stocks
ELSS (Equity Linked Savings Scheme)at least 80% in equities

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SEBI Categorization of Debt Mutual Funds

Debt FundsPortfolio Construction
Overnight fundsholding portfolio with maturity of upto 1 day
Liquid fundsholding portfolio with maturity of upto 91 day
Ultra Short Term Fundsholding portfolio with maturity 3-6 months
Low durationholding portfolio with maturity 6-12 months
Money marketholding portfolio of money market instruments with maturity of upto 1 year
Short durationholding portfolio with maturity 1-3 years
Medium durationholding portfolio with maturity 3-4 years
Medium to long durationholding portfolio with maturity 4-7 years
Long durationholding portfolio with maturity more than 7 years
Dynamic bond Fundscan invest across durations
Corporate bond Fundsatleast 80% in corporate bonds (AA+ & above)
Credit risk fundatleast 65% in corporate bonds below AA
Banking and PSUatleast 80% in instruments issued by banks, PSU undertakings, municipal corporations, etc.
Gilt Fundatleast 80% in instruments issued by government across periods
Gilt with 10-year constant durationatleast 80% in instruments issued by government across periods such that average maturity is 10 years
Floater Fundsatleast 65% in floating rate instruments

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SEBI Categorization of Hybrid Mutual Funds

Hybrid FundsPortfolio Construction
Conservative hybrid funds10 to 25% equity allocation and 75 to 90% in debt
Balanced hybrid funds40 to 60% equity allocation and 40 to 60% in debt
Aggressive hybrid funds65 to 80% equity allocation and 20 to 35% in debt
Dynamic Asset AllocationEquity/debt – dynamic allocation
Multi-Asset fundsinvest in at least 3 assets with minimum of 10% in each
Arbitrage fund65% in arbitrage opportunities
Equity SavingsEquity – 65%, debt 10% and rest in hedged and unhedged instruments

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SEBI Rationalization of Other Schemes

Other SchemesPortfolio Construction
Index Funds95% in securites of a particular index
FOFs95% in the underlyring fund

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SEBI Categorization of Solution Oriented Mutual Funds

Solution OrientedPortfolio Construction
Retirement FundSchemes having lock-in for at least 5 years or till retirement age whichever is earlier
Children FundSchemes having lock-in for at least 5 years or till the child attains 18 whichever is earlier

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Source: SEBI Circualr

These changes, SEBI hopes, will enable investors to know where the scheme invests. What is the level of risk involved and how much return an investor should expect?

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Frequently Asked Questions

How are mutual funds being recategorised?

SEBI has changed the categorization of mutual funds to improve clarity and risk disclosure for investors. Mutual funds are now classified into five categories: Equity, Debt, Hybrid, Solution Oriented and Others.
Scheme names have also been changed to indicate the risk involved in the investment clearly.
A lock-in period has been introduced for Solution Oriented Schemes like children’s funds and retirement funds. But the lock-in period does not apply to existing investors.
Fund houses must also modify other aspects of the scheme, such as investment mandate, benchmark, and investment strategy, to align with the new regulation.

What are the New Categories of Mutual Fund Schemes?

The new categories and the sub categories of mutual fund schemes are as follows:
Equity Mutual Fund: 10 Subcategories – large-cap, large & mid-cap, mid-cap, small-cap, multi-cap, focussed, value, contra, dividend yield, sectoral/thematic and ELSS funds.
Debt Mutual Fund: 16 Subcategories – overnight, liquid, money market, ultra-short duration, low duration, short duration, medium duration, medium to long duration, long duration, corporate bond, dynamic bond, credit risk, floater, banking & PSU, Gilt Fund, and Gilt fund with 10-year constant duration.
Hybrid Mutual Fund: 6 Subcategories – conservative hybrid, balanced hybrid, balanced advantage, aggressive hybrid, multi-asset allocation, arbitrage and equity savings fund.
Solution-Oriented Funds: 2 Subcategories – Retirement and Children’s fund. These schemes have a lock-in period of at least 5 years. 
Other Funds: 2 Subcategories – Index and Fund of Funds.

What is the impact of the categorisation and rationalisation by SEBI?

SEBI’s categorization and rationalization of mutual fund schemes will provide clarity for investors and assist them in selecting a fund that aligns with their investment goals. The changes in the mutual fund industry include: portfolio restructuring, improved understanding of risk, reduction of mis-selling, and an increase in assets under management.